In the day just past, bonds put in an extremely calm trading session with the lowest volume and volatility in weeks.  Treasuries ebbed inconsequentially higher and MBS held steady amid a lack of new, threatening US/China trade headlines.

In the day ahead, bonds will be defending fairly significant overnight gains that came courtesy of European bond markets.  Long story short, Italy said it would break EU rules for its proposed budget in order to spur jobs.  Investors are increasingly worried about Italy's solvency.  This creates safe-haven buying in German Bunds and other core sovereign debt.  It also spills over to help US Treasuries. 

On both sides of the pond, trading positions had been very short following the trade war rally.  After all, it seemed obvious that rates should bounce higher after trade war drama died down.  But the wild card was the imbalance of short positions and the tendency for some traders to aggressively buy bonds in those circumstances, forcing a "short squeeze."  

Bonds now look to defend the overnight gains by seeking validation from today's important economic data.  The headliner is the 8:30am Retails Sales report, but the day's other data could also combine to add or detract from Retail Sales' message.